The number of companies that provide online investment management and financial planning has increased exponentially over the last few years.  These companies are able to leverage technology to reduce the cost, and lower the account minimums, making financial planning and investment management more affordable than it’s ever been for many lower and middle-class families.  Although online financial advisors are granting access to financial planning and investment management to millions of Americans who were previously unable to afford this service, they aren’t for everyone.  Below are 3 things to consider before using an online advisor:

Are you looking for an investment manager, or a financial planner?

Most companies that provide online financial advice are only providing investment management services.  While some of these companies incorporate very basic tax savings and portfolio management strategies such as tax-loss harvesting, and periodic rebalancing, they do not include advice on important financial planning topics such as income tax planning, insurance planning, estate planning, employee benefits, and cash flow modeling.   Morningstar has conducted research that estimates the value of using a financial planner has the same impact on expected utility as an annual arithmetic return increase of  1.59%/year, which can add far more “alpha” than portfolio management alone.  If your goal is to grow your retirement investments using only the answers to a risk questionnaire as the basis of your investment decisions, then an online investment manager may be for you.  However, if you are looking for a more customized portfolio, which uses value added financial planning as the basis of your investment decisions, make sure you are hiring a financial planner.

Do you have access to a CFP®? If so, how many clients to they serve?

There is some comfort in being able to talk to an actual person to make sure you are on the right track, rather than relying on a computer algorithm to make sure you are taking all the right steps necessary to achieve your goals.  If financial planning is important to you, you should have access to a CFP®, which is the standard of excellence in financial planning.  Other than ensuring a human is periodically looking over your situation, having access to a CFP® can provide many intangible benefits, such as being able to talk to someone in times of uncertainty.  There are only a few online advisory firms that grant access to a CFP®.  If you are going to utilize the services of these firms, it’s important to know how many clients each advisor is serving.  Can an advisor servicing 500-1,000 clients remember your goals, and unique circumstances affecting your financial plan?  If you’re in need of assistance, what would be the response time?  If you’re looking for an advisor that will be able to remember your unique situation, they should be serving no more than 200 clients.

Do you need more than generic financial advice?

Are you in need of complex tax, insurance, or estate planning strategies?  If you are a high income earner, have accumulated a significant amount of wealth, or own a business, the answer to this question is probably yes.  Because the online advisors have utilized technology to automate financial planning and investment analysis, many of the recommendations will be generic “cookie cutter” advice.  This is sufficient if you have basic needs, but if you are in need of more customized analysis and recommendations, you may be best served by using a Certified Financial Planner.

Online advisory firms are a great tool for many Americans who haven’t had affordable access to financial planning and investment management.  These services can take care of the basics, but they are not focused on adding extra value to your unique situation.  If you do end up using the services of an online advisor, it’s important to understand that you are reducing the cost of these services by limiting customization, and access to your advisor.

                                  By: Adam Glassberg, CFP®, CIMA® – May 6th, 2014